The specter of global deflation

The G-7 was made to integrate the macroeconomic policies of the rich countries in order to track
both the Scylla of Inflation and the Charybdis of stagnation. Years ago, the efforts to synchronize
fiscal and monetary initiatives has proven to be ineffective, and the modicum of cooperation was
achieved has failed to bring Japan out of a decade-long to move back or to prevent the onset of a
new global receding.

Deflation can be costly, and is difficult to anticipate. Deflation was not uncommon in the 19th
Century, but even then its duration was often unanticipated. In the late 1920s and early 1930s, U.S.
policy makers exacerbated deflation by underestimating its consequences and by failing to take
aggressive action. In contrast, countries that exited the Gold Standard earlier such as Sweden and
Japan, recovered from deflation relatively quickly. Historically, deflation generally muted growth
prospects, although it was mainly during the Great Depression that the most severe effects of
deflation were felt.

In the United States, the Federal Reserve made two policy mistakes. First, it saw the initial collapse
in prices and demand as “necessary” to correct excesses of the 1920s. It regarded the collapse as a
result of nonmonetary forces including creation of excess capacity in the late 1920s and beyond the
influence of monetary policy. The large number of bank failures in 1930 were according to its view
the result of poor management and lending for speculative equity and land deals. Second, it tried to
maintain the gold standard. While the Federal Reserve did ease, it paid no attention to the money
supply.

Deflationary impulses can be transmitted across countries. This was not an uncommon occurrence
under the Gold Standard. However, in a global economy with generally flexible exchange rates and
independent policy regimes, a generalized international propagation of deflation appears unlikely.

Another important impact of an economy undergoing rapid productivity growth experiencing a

decline in unit costs and export prices will be significant terms of trade gains for its trading partners.
This would be reflected in an increase in real incomes and demand growth, which could have
substantial positive multiplier effects. These effects could mute the impact of deflationary pressures
noted above, depending on the share of tradables in consumption in the importing countries.

Gary Shilling is rarer than a black swan, he's an economist who foresaw deflation. While central
bankers were promising endless prosperity through managed inflation and influential economists
were celebrating the 'New Economy', Gary's followers were holding treasury bonds and preparing
for the big shift. Shilling has predicted the 'impossible' several times in his career, so his colleagues
should no longer be surprised when he turns out to be right.In economies, Kondratiev waves also
called long waves are hypothesized cycle-like phenomena in the modern world economy. It is stated
that the period of a wave ranges from forty to sixty years, the cycles consist of alternating intervals
of high sectoral growth and intervals of relatively slow growth.

The last wave in the 1930's and 1940's was marked by the Great Depression and World War II. The
elevation of the current wave began in the 1950's until it was reached in the 1980's and 1990's. The
'new economy' of the late 1990's does not go beyond of the business cycle.

Early 2000s recession. The early 2000s recession was a decline in economic activity which mainly
occurred in developed countries. People began to realize that the integration of economies in the
era of rapid globalization came the specter of synchronized depression.